For seven quarters running, FuelCell Energy (NASDAQ:FCEL) has managed the neat trick of losing vast sums of money while still beating analyst "earnings" ("losses," actually) estimates. Tomorrow morning, when it reports its fiscal Q2 2006 earnings results, the company aims to make it two straight years of losing less money than the experts predicted.

What analysts say:

  • Buy, sell, or waffle? Half a dozen analysts follow FuelCell. Only one of them counsels selling the stock. One more says hold it. The other four all say buy.
  • Revenues. On average, they're looking for 15% sales growth tomorrow, to $7 million.
  • Earnings. Are you kidding? On the contrary, analysts expect FuelCell's losses to expand from $0.35 per share last year to $0.42 per share in tomorrow's news.

What management says:
In April, FuelCell tweaked its equity ownership structure somewhat. It converted 39,755 shares of the firm's Series B Cumulative Convertible Perpetual Preferred Stock into 3,383,403 shares of common stock at the rate of one preferred share to 85.1064 shares of common. In the process, FuelCell was required to pay out $4.1 million in cash to the owners of the preferred shares as a "conversion premium." To raise cash to pay the premium, FuelCell further diluted existing shareholders by selling an additional 337,500 common shares at an average price of $12.10 per share.

What's that mean to you, the FuelCell shareholder? First of all, the share count will rise by at least 3.7 million shares when tomorrow's results come out -- diluting your stake in the firm, and the per-share loss attributable to your shares, by about 8%. Second, losses will rise by about $0.08 per share, as the conversion premium is charged against earnings as a dividend paid to the owners of the converted preferred stock.

What management does:
Bulls love FuelCell's margins. Not stock bulls, mind you -- the ones in the ring. The ones who chase things that are colored bright blood red. In previewing FuelCell's results last quarter, I did mention that the firm's margins appeared to be "moving in the right general direction" as its losses declined. But the firm reversed that trend last quarter. Margins now appear to be heading back south again.

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All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In FuelCell's last earnings report, CEO R. Daniel Brdar stated that in the fiscal first quarter, his firm "Accelerat[ed] the drive to profitability." And the company's goals for 2006? To "build on performance and cost reduction successes to date, and increase sales." However, product sales actually declined 40% last quarter (beacuse of an increase in R&D contracts, overall revenues only declined 21%), while operating costs contracted only 10%. Right now, the firm loses $2 to $3 for every $1 it collects in revenue, and continues to dilute outside shareholders at a frenetic pace.

Which leads this Fool to suspect that even if the firm does eventually reach profitability, only a trickle of those profits will filter down to the repeatedly diluted shareholding masses.


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Fool contributor Rich Smith does not own shares of any company named above.